Nasdaq’s return could mark ‘one of the greatest retracements’ ever

By Shawn Langlois

Rogue Pictures/Everett Collection

The S&P 500 is there right now. The Dow industrials were there just last week. And the Russell 2,000 was there back in July. Yes, it’s been a strangely sleepy summer of new highs for almost all the major U.S. indexes.

But let’s not forget about the Nasdaq, the tech-heavy index that essentially replaced the blue chips as the go-to stock market gauge during the dotcom craze. It’s still quite a ways away from its 5,132.52 intraday peak back in 2000.

Lost in all the headlines about records in the other indexes is the fact that the Nasdaq, with a 10% rally so far this year, is the biggest winner of all of them in 2014. And, according to Stefan Cheplick, “the most epic all-time high” is yet to come.

“It is time everyone started watching the Nasdaq on a daily basis,” he said. “One of the greatest retracements in market history could be in order.”

Maybe the Nasdaq will ascend to that point again, but it’s got a big seasonal hurdle to get over.

Welcome to September, the driest month of the year when it comes to returns. In fact, the S&P 500 has finished higher a scant 45% of the time going back to 1945, according to S&P Capital IQ. That’s a pretty dismal number.

Even snorting market bull James Paulsen, who helps watch over a heaving $345 billion in assets at Wells Capital Management, admits he’s “a little worried” and is bracing for a 15% drop at some point this autumn.

Then again, all this talk of nosebleed valuations and imminent collapse are overblown, from a statistical perspective. Our call of the day goes into that below.

The quote of the day:“If neglected, I am certain that after a month they will reach Europe and, after another month, America.” — Saudi King Abdullah, on ISIS.

The economy: The biggie hits Friday in the form of the nonfarm payrolls, but the ISM manufacturing index lands today at 10:00 a.m. Eastern and is something worthwhile for traders to parse. Construction spending crosses at the same time.

Eric Cantor, former House majority leader and lawyer by trade with no banking background, lands on Wall Street. Where else?

The chart of the day: Sand is the new gold, according Ivaylo Ivanov of Ivanhoff Capital. “During the Gold Rush in the 1850s, merchants made a lot more money than gold diggers,” he wrote. “During the fracking rush of our time, some of the biggest winners have been sand producers.”

The call of the day: CAPE: four little letters that strike fear in the hearts of skittish investors in this market. And why wouldn’t they? “It looks like a peak” and “Irrational exuberance is back!” are just a few of the headlines being thrown around this year. Robert Shiller’s cyclically adjusted price-earnings ratio, which measures inflation-adjusted earnings over 10-year periods, received lots of cred when it peaked before the dotcom bust and the financial crisis. And it’s sending off a similar signal today. Then why isn’t Georgetown professor Salil Mehta worried?

In terms of probabilities, there’s really no warning sign at all. Mehta says we are “wayfaring on the edge”, but pointed out that “having extremely high CAPE values proves little, with statistical confidence. And such poor modeling can be costly.” Read his hefty number-crunching exercise on the Statistical Ideas blog.

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Need to Know (NTK) guides investors to the most important, insightful items required to chart a course ahead of each trading day. Anchored by lead writer Shawn Langlois, NTK will sift through the fire hose of news, commentary and data, from traditional and non-traditional sources, and extract what’s most essential. You can start reading NTK here as it begins publishing at approximately 6:30 a.m. ET, or sign up here to get a version in your email box every morning at approximately 8:45. a.m. ET.